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FDIC Consumer News - Summer 1997

Important Update: Changes in FDIC Deposit Insurance Coverage

The FDIC deposit insurance rules have undergone a series of changes starting in the fall of 2008. As a result, certain previously published information related to FDIC insurance coverage may not reflect the current rules. For details about the changes, visit Changes in FDIC Deposit Insurance Coverage. For more information about FDIC insurance, go to www.fdic.gov/deposit/deposits/index.html or call toll-free 1-877-ASK-FDIC (1-877-275-3342). For the hearing-impaired, the number is 1-800-925-4618.

New Tax Cuts Mean Opportunities for Savers, Home Owners

The new tax cut hammered out by Congress and the White House should be good news for people saving for retirement or college tuition costs, and for many home buyers and sellers. Here's an overview of key provisions. Because the law is new and complicated, we suggest that you obtain legal or tax advice before making any significant financial moves.

Retirement Savings: The traditional Individual Retirement Account (IRA) was made more attractive, and a new IRA was created. Specifically:

  • More people will be able to claim a $2,000 tax deduction for contributions to a traditional IRA. That's largely because eligibility limits, based on the adjusted gross income (AGI) calculated on tax returns, gradually will be doubled to $50,000 for single taxpayers and $80,000 for couples.

  • The new "Roth IRA," named for Senate Finance Committee chairman William Roth of Delaware, doesn't qualify for a tax deduction on contributions but all earnings and withdrawals will be tax-free if the account is held for at least five years and you're at least 59 1/2 years old. Singles with an AGI of less than $110,000 and couples with an AGI of less than $160,000 are eligible for the new IRA. Funds in a traditional IRA can be converted to a Roth IRA if the taxpayer's AGI is less than $100,000. The combined maximum that can be contributed into IRAs remains at $2,000 per year, meaning that most taxpayers will have to determine which of these two IRAs makes more sense for them.

  • Withdrawals from any IRA can be made before age 59 1/2 without paying a 10 percent penalty if used to buy a first home or for college tuition. However, the withdrawal will be subject to income taxes.

These changes do not apply to 401(k) and Keogh retirement programs.

College Savings: Depending on their income levels, many families (including many middle-class households) will qualify for a new savings account to pay for higher education. This account, which is similar to an IRA, will enable qualifying parents to contribute up to $500 a year for each child under age 18 and to have the earnings grow tax-free. Although final rules must be written, it appears that the $2,000 annual limit on IRA contributions mentioned previously does not apply to this savings account for college savings.

Many families also will qualify for tuition-related tax credits and a tax deduction for interest payments on student loans. And as mentioned, penalty-free withdrawals from IRAs will be permitted for tuition payments for college, post-secondary vocational school or graduate school.

Real Estate: If you sell your home after May 6, 1997, up to $500,000 in profits will be exempt from taxes for a couple filing a joint return ($250,000 for an individual return). This exclusion can be used every two years. The new law is more generous than the previous one, which allowed a one-time exclusion of $125,000 for people 55 years old or older, and the deferral of taxes on profits for any home seller who used the money to buy a more expensive home. The U.S. Treasury Department says the new law will exempt from taxes more than 99 percent of all home sales.

As mentioned, the new law also will permit penalty-free withdrawals from an IRA before age 59 1/2 if used for a first-time home purchase. Even parents and grandparents wanting to help their kin with a first-time home purchase can withdraw penalty-free from their IRAs.

Capital Gains: Investors in stocks, bonds, mutual funds, real estate and other assets may pay lower taxes on "capital gains" -- essentially the profit from selling the asset. The tax on assets held on a "long-term" basis (generally 18 months, up from 12 months under the previous law) drops from 15 percent to 10 percent for people in the lowest tax bracket, and from 28 percent to 20 percent for those in the highest tax bracket.

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Last Updated 01/22/2009 communications@fdic.gov